No More Credit Card Debt, Now We Need a New Budget

I’ve had thousands of dollars in credit card debt since 1997. I remember applying for a job in March of 2001 which I calculated would help me erase my credit card debt in about twelve months. I didn’t get that job. Nobody got that job, in fact, the entire web design sector was crashing, and I had just moved to Seattle. Almost two years ago on this very website I declared that I would be free of credit card debt six months later. That didn’t happen, either. I admit that this problem is almost entirely my fault, even though circumstances beyond my control have made the problem worse, like a 10% pay cut from last Spring that still hasn’t been fully restored (even though we’ve hired two new people).

But in January of 2010, I decided (again) that enough was enough, and I started posting regular debt updates, and limited myself to spending only $100 a week. I thought it would be plenty, but on weeks that required gasoline or a haircut or car maintenance, well, it didn’t always work out as planned. On the upside, I have more than one source of income, and I’ve been able to maintain a regular schedule of paying about $1,300 a month toward that debt.

It hasn’t been a joy funneling every dollar I could toward the ghost of debt that has been haunting me for thirteen years. We missed an entire growing season in the backyard because we didn’t have the money to pay someone to fix the faucet, to say nothing of every other home improvement project that was put on hold.

Thanks to the obligation to post regular, detailed updates, I found places I could be saving more money, and on May 7th, I was able to completely pay off one of my two credit cards. Now here I am, on the cusp of paying off the second, and last, credit card that I ever hope to carry a balance on. No, I really mean it this time. I got paid today, and between that and the extra money from side jobs, I am able to bring the balance to just a couple hundred dollars.

Now, even if I double my weekly budget for myself, and ignoring side jobs and the restoration of my proper salary, I’m still going to have $1,100 a month that I don’t owe to anybody. I can’t stress this enough: this is completely new territory for me. First, of course, I’m going to throw a party. There will be good wine and delicious snacks. You can’t talk me out of that.

After the party, though, I’m conflicted about how best to deal with the extra income. We still have car loans and a mortgage, but I don’t feel a strong compulsion to pay those down faster than is scheduled. I know that most of our very smart readers will encourage me to start saving toward a three- or six-month emergency buffer. When I look at the three-month number of $12,820, I feel the same dread I used to feel when my credit card debt totaled a similar number. Suffice it to say that I’ve never saved even 10% of that amount in my life, and I’m shocked that we go through that many expenses in just three months, but we do.

At present, mostly because of my previous credit card payments, my wife and I put 10% of our leftover income into a joint savings account. If we kept it to 10%, we’d meet our three-month buffer in twenty-six months. If we bumped it up to 50%, we’d meet the same goal in five months, and we’d have about $200 each for weekly expenses. In reality, we’ll probably settle on something higher than 25% but lower than 50%. There are still all those household projects to take care of, vet bills, maybe some occasional new clothes, etc.

All of the above assumes that both of us want to stay at our current jobs, earning the same salaries, which isn’t necessarily true. We both have strong creative urges that are better fulfilled at the kind of projects you find outside of offices, and if we could still live without fear of homelessness, either one of us might be persuaded to seek a job with a lower salary and fewer hours and/or brain requirements, so that we might have more opportunities to pursue those creative projects.

If you sympathize with that, or even if you don’t, I’d love to hear your story in the comments below.

Smithee formerly lived primarily on credit cards and the good will of his friends. He is a newbie to personal finance but quickly learning from his past mistakes. You can follow him on Twitter, where his user name is @SmitheeConsumer. View all articles by Smithee.

First off, congrats on getting those two paid off so quickly. I know that was tough. And it seems like just by not having that burden, it’s allowing you to think more on doing what you love instead of doing what you have to do to pay the bills. I am wondering if you would be drawn even further to follow your creative path if you didn’t have the car loan? Do you think not having any debt would push you further into your creative ideas? Some people might say that any debt can make us stay where we are instead of pursuing other goals. Just curious if you feel like it’s holding you back at all.

What about retirement savings? Bumping up those would be an automatic and relatively painless way to save money. I’d also put some money aside in the EF. Set smaller targets for yourself — build up to 1 month’s worth of expenses, Try to do that in 4 months (using approximately $1k/month of the “extra”). Then, in month 5 use that money for something the two of you want (whether it’s a home improvement, electronics, a fancy evening out, whatever). Then build up 1 more month’s worth of expenses, and repeat the cycle. If you set smaller goals, with rewards built in, you’ll be more motivated to do achieve them.
Besides, if long-term you want to pursue more creative endeavors, you’re going to need savings in the bank.

I agree with Justin’s philosophy. We all have many things we’re saving for at once, and though it takes longer to achieve the end goals, I feel emotionally better knowing I’m putting money in an Emergency Fund AND in a fund for Christmas, future vacations, etc.

Extended deprivation not only stinks, but it’s very difficult to endure. At some point you have to feel as though those long days at work have a reward other than financial security.

Smithee: I just want to say congratulations for finally shedding that millstone around your neck. From millstone to milestone, so to speak. Thanks, too, for writing about it because I bet a whole lot of people feel the process is endless. It’s encouraging to read about someone who’s free and clear.

Congrats! I like your idea of throwing a party. Just advice there: Don’t go overboard. You can easily spend $1000+ on fancy wines and cheeses. Second piece of advice: Save up for it. Don’t have the party as soon as you pay off the credit card. Save up a little bit, and maybe have the party a month or two later.

My wife and I used to eat out a bunch. We liked the dinner-and-a-movie dates we used to have. Then, much like your story, we realized we were in debt (~$12k). This was spread over multiple credit cards. We snowballed the debt, paying it off less than a year after we started. After we paid off each card, we celebrated by going to dinner and watching a movie as a way to reward ourselves.

Congratulations! I know you don’t feel compelled to pay off the car loan, but if it were me that’s exactly what I would do? Why? A number of reasons. Here are a couple. First, the interest is not tax favored. While I personally do not like any debt, I appreciate the difference between car and home debts (with home debt being considered “good” debt by some). And second, the cars are going down in value – and likely faster than the principal balance on your loan. So if you get into a car accident and total the car, your car insurance is going to give you $X and you’re going to have to pay more than that to your lender. Then what do you do for a car? You’ll have to do this all over again. So I would pay off the car with the highest interest rate first. And then I would work on the other one. You could “snowball” the credit card payments into the car payments and continue the same lifestyle. I also wouldn’t mind rewarding myself with a small, but symbolic pleasure for working so hard.

Finally, I would also make sure I had at least one month emergency fund (with a target of at least 3-6 months too). It’s much easier to sleep at night when you know if all goes wrong you have a little buffer. Good luck and great work!

Some great advice already posted. I lean towards getting your emergency fund established and then paying off your car loans. The key about paying off car loans is to keep putting away the same amount of the car payments into a savings account for the next car/s you are going to have to be buying.

Having the emergency fund and no debt should provide you with a new sense of freedom. I realize that things come up and you have to enjoy life, but how stressful has it been having this lingering credit card debt and the inability to do some of the things you want to do around your house.

Like you, I am on the cusp of paying off a multi year (low interest rate) credit card debt, but I also have an emergency fund and no other debt except my mortgage.

But I also have rewarded myself along the way and I do feel that is important, as long as you stay on track.

Congrats!! Read Dave Ramsey’s Total Money Makeover and use that snowball to both build up a reserve and get rid of your car payment! You can do it! Personally my wife and I had ~40k of debt when we graduated college in ’03. Last month we just paid off our house by sticking to a budget (her income, mine goes towards payoffs). We still have two other properties that we can’t sell and are renting out, but having no debt feels like you finally own and are in control of your life. Everything I studied in college was to get a job which made money, after college every extra cent went towards ridding of debt or property improvements (only NEEDED ones). Now I need to decide what my next goal is, and you can be there too one day.

Question for you, depending on your circle of friends/family/etc. Do you find it difficult to celebrate this goal (i.e. have a party and announce you have no cc debt)? I have many friends/family who struggle right now with good jobs and young families, but I truly hesitate to mention to anyone that I have paid off my cars and mortgage since I don’t really want the backlash of people thinking I’m rich or something. Obviously I’m proud of it, and I really don’t want to brag or anything, it is just interesting that I should feel this way. Only a select few people know of my good fortune, do you have the same situation?? Again congrats!

I can DEFINITELY relate to setting goals…missing goals…wondering what happened…re-setting goals…then missing them again! But it’s about perseverance and resilience and a willingness to recognize that you have to adjust your mindset before you can ever move forward and actually accomplish success. And it feels SOOO good to check that credit card debt elimination off the list! CONGRATULATIONS, from someone who has definitely been there!!! My next goal is student loans…got about 12 months to go on that (i.e. 18 months)… :)

Congratulations! I can completely relate. We have been free of all credit card/line of credit/personal loan debt for about two years now. We still have a mortgage and one car payment, but I honestly don’t worry much with regard to those. They each get extra thrown at them, so they’ll be paid off sooner than the schedule. I also like that we’ve been able to build up a cushion and put money aside for retirement. When so much was going to pay the excess debt, there was no cushion. As we got older, that got scarier.

I know car loans are lousy debt, but I think building a cushion is very important. You might want to put extra into the car loan to pay it a little faster, but concentrate on cushion.

We recently paid off my husband’s car about two years ahead of schedule because we had the means to do it, because I was tired of paying interest on it, and because it’s one less bill to pay every month. (I suspect, relative to many folks, we don’t have too many bills to start with.) It’s also one less debt to worry about if something goes wrong.

Congrats on getting out of credit card debt! I just got out of it too, again, with my tax return. I swear I will never, barring major negative unforeseen circumstances, get back in credit card debt again. I felt as if I had written the article because I am now faced with what to do with the extra “left over” monthly income. I think I have to shoot for the car loan next and have the mortgage as the only large monthly bill left. Hope you’re still out of debt and have enjoyed some of your extra monthly cash.

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About Luke Landes

Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke has contributed to PC World Magazine, US News, Forbes, and other publications. Read more about Luke and about Consumerism Commentary.

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